UK: Weekly Tax Update - June 8, 2015

Last Updated: 12 June 2015
Article by Tina Riches

1.General news

1.1 Penalties for late submission of self-assessment returns

HMRC has issued a note following the recent press comment on £100 late submission penalties and reasonable excuse. Those having their penalty notice cancelled will no doubt be relieved to see that HMRC are applying the law in a reasonable way. However, it is unclear why those with a reasonable excuse who have not yet submitted their return, for whom HMRC have not agreed to cancel notices, will not face the same treatment.

The HMRC note includes the following comments:

"....the deadline for appealing fines for 2013/14 tax year has now passed. Those who have already appealed will only be let off the fine if they've now sent in their return, paid the tax due, appealed and have a good reason for sending it in late.

In addition, the more complete picture that digital technology gives us means, in the longer term, we want to move away from sending out penalty notices as a mechanical reaction to a single missed deadline. We will be able to track patterns of behaviour so we only focus on those who persistently fail to pay or send their tax returns on time.

Next week, and for the same reasons, we will be announcing changes to penalties incurred for sending real time PAYE information late."

www.gov.uk/government/news/self-assessment-penalties

2.Private client

2.1 HMRC newsletter for Trust and Estate practitioners

HMRC's June newsletter for trust and estate practitioners amongst other things covers the following:

  • An explanation for the withdrawal of form R27 ('Potential repayment to the estate').
  • A timeline setting out when taxpayers can expect to hear back from HMRC after submitting form IHT400 (Inheritance Tax account) – a flowchart explains the process, which can take up to 20 weeks.
  • January 2015 updates to HMRC's IHT and trust, settlement and estate manuals, including a new section of guidance on non-resident trusts (at TSEM10000).

www.gov.uk/government/uploads/system/uploads/attachment_data/file/431188/June_2015_Newsletter_New_HMRC_branding_.pdf

2.2 Furnished holiday letting business – no entitlement to BPR as mainly Investment

In a recent case, the First-tier Tribunal (FTT) decided that a furnished holiday letting (FHL) business was mainly involved in the making and holding of investments rather than being relevant business property eligible for business property relief (BPR) for inheritance tax (on a lifetime transfer into a settlement). Although additional services were provided, such as the provision of a 'welcome pack', linen and towels, it was held that the value of these did not exceed the value of the services traditionally required to manage an investment property.

The case, Green v HMRC [2015] UK FTT 0236 (TC), included a comparison with the George and Pawson cases. As highlighted by the Counsel for HMRC, 'guests [were] essentially paying for the right to stay in 'a pearl of a property in a beautiful location'.

The case includes a useful analysis of the services provided in the context of what the client was paying for. It could therefore be useful reading for anyone considering the relevance of BPR to a business.

www.bailii.org/uk/cases/UKFTT/TC/2015/TC04427.pdf

3.Trust, estates and IHT

3.1 Charity Commission guidance re fit and proper

A Bill currently before Parliament will give the Charity Commission power to make orders disqualifying individuals from acting as trustees. One of the reasons for doing so is where HMRC has found a person not to be a 'fit and proper person' to be a manager of a body or trust. This may have serious implications for charities considering appointing partners in large professional firms, and for the partners themselves, who are jointly and severally liable for the current and past actions of their partnerships.

A factor used by HMRC to decide whether someone is fit and proper includes a wide ranging retrospective consideration of involvement in designing and/or promoting tax avoidance schemes, which can have implications for the charity's entitlement to tax relief.

The Charities (Protection and Social Investment) Bill now before Parliament is intended to:

  • provide stronger protection for charities in England and Wales from individuals who are unfit to be charity trustees;
  • equip the Charity Commission with new or strengthened powers to tackle abuse of charity more effectively and efficiently; and
  • give charities a new power to make social investments (investments that pursue both a financial and social return).

The Charity Commission has published a policy paper alongside the Bill. The policy paper provides background to its thoughts on the proposed disqualification power included in the Bill.

The Bill proposes that the commission would only be able to make a disqualification order when it is satisfied that each of the following tests is met:

1)At least 1 of 6 'conditions' applies.

2)The person is unfit to be a trustee.

3) The order is desirable in the public interest in order to protect public trust and confidence in charities.

The six conditions referred to at Test 1 above are:

a) a person has been cautioned for an offence against a charity or in the administration of a charity for which a conviction would bring automatic disqualification;

b) a person has been convicted of an offence in another country that:

  • is against, or involves the administration of, a charity or similar body;
  • if committed here would bring automatic disqualification from acting as a trustee.

c) a person has been found by HMRC not to be a 'fit and proper person' to be a manager of a body or trust;

d) a trustee, officer, agent or employee of a charity was responsible for, contributed to or facilitated misconduct or mismanagement in a charity;

e) an officer or employee of a corporate trustee was responsible for, contributed to or facilitated misconduct or mismanagement in a charity;

f) other conduct, whether or not in relation to a charity that is, or is likely to be, damaging to public trust and confidence in a charity or charities.

The Bill:

http://services.parliament.uk/bills/2015-16/charitiesprotectionandsocialinvestment.html

Charity Commission policy paper:

www.gov.uk/government/uploads/system/uploads/attachment_data/file/430644/proposed_disqualification_power.pdf

HMRC's guidance on the fit and proper persons test for the FA 2010 'management condition':

www.gov.uk/government/publications/charities-fit-and-proper-persons-test/guidance-on-the-fit-and-proper-persons-test

4.PAYE and employment

4.1 HMRC spotlight 24 employment allowance avoidance scheme

In its spotlight section HMRC has highlighted an attempted avoidance scheme designed to exploit the availability of the employment allowance to eliminate employer's NIC costs.

The arrangement is for a payroll company to take on an employer's staff. The payroll company sets up underlying companies, each of which employs small numbers of the former employer's staff. The former employer is invoiced for the services of their ex staff. Each company (set up by the payroll company) claims the full Employment Allowance to wipe out the employer NICs liability.

The NICA 2014 provides for an exception to the employment allowance where the NIC arises as a result of workers supplied where the individual worker is under an obligation to personally provide their service to the client and there are arrangements involving third parties by which the services are performed (NICA 2014 s.2(4) and SSCBA 1992 s.4A and SI 2000/727 and SI 2007/2071).

In addition the GAAR applies to NIC.

HMRC's spotlight comments: "There is a targeted anti-avoidance rule in the Employment Allowance, so attempted avoidance schemes like this, which seek to use artificial and contrived arrangements to get an unintended advantage, do not work."

www.gov.uk/government/publications/tax-avoidance-schemes-currently-in-the- spotlight/spotlight-24-employment-allowance-avoidance-scheme-contrived- arrangements-caught-by-existing-rules

4.2 Advisory fuel rates changes from 1 June 2015

Further to our Update of 1 June 2015 item 3.3, fuel rate charges were incorrectly shown on the .Gov.uk website. The petrol rate for engine size 1401cc – 2000cc has increased to 14p.

www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-june-2015

5.Business tax

5.1 Gift Aid: Partnership declarations invalid from April 2016

HMRC has amended its detailed guidance notes for charities for the April 2016 changes in how gift aid is applied to partnership donations so that from 6 April 2016 gift aid declarations will need to be made by each individual partner for partnership donations. A change in the law to effectively permit partnership declarations might have been less burdensome for business and encouraged collective charitable giving.

In England, Wales and Northern Ireland a business partnership doesn't have a legal personality. A donation by a partnership consisting of individuals is treated as made by the underlying partners. Up to and including 5 April 2016 one partner can make a Gift Aid declaration on behalf of all the partners, provided he or she has the power to do so under the terms of the partnership agreement or some other instrument given under seal. They can do this on the same declaration form, provided it lists all the individual partners' names and home addresses.

From 6 April 2016, when a business partnership makes a donation to a charity or CASC each individual partner will have to make their own Gift Aid declaration in order to reflect the correct legal position. Each partner's Gift Aid declaration must contain their name and full home address and be given to the charity or CASC. The amount of each partner's share of the whole donation also needs to be specified in their declaration or in any supporting correspondence given to a charity or CASC.

The partners should enter their share of the donation on their own Self-Assessment tax return. How the donation is apportioned between the partners is a matter for them to decide. For example in:

  • equal shares;
  • accordance with their share of the partnership profits set out in the partnership agreement;
  • whatever split the partners agree.

The name and address of each partner that makes a Gift Aid donation to a charity or CASC must be recorded and shown separately on the Gift Aid schedule when it makes its claim for repayment of tax to HMRC.

It will be interesting to see whether the new Government, which wishes to reduce red tape, will consider whether the law around partnerships should be changed. The OTS in its partnership report recommended that HMRC should consider seeking a change in the law so that either:

i) The firm may make a donation and the relevant Gift Aid declaration is made by the representative partner. The donation would be treated as made under Gift Aid by the individual partners with the charity entitled to reclaim the basic rate income tax.

ii) The firm may simply take a deduction for the donation in its computation of trading profits. In this case it would be treated as a gross donation with no eligibility for the charity to reclaim basic rate tax, in parallel to the Gift Aid system for companies.

If either were implemented, such recent HMRC changes to practice, to tie in with the strict interpretation of the rule of law, would no longer be required.

See section 3.10 at:

www.gov.uk/government/publications/charities-detailed-guidance-notes/chapter-3-gift-aid

5.2 Whether interest coupons the subject of a repo where taxable

The First-tier Tribunal (FTT) has concluded that floating rate note interest coupon receipts totalling almost £78m, that were the subject of a repo transaction, were not rights in a loan relationship that were excluded from taxation as a result of what was FA1996 Sch 9 para 15(1). As a result the interest coupons for the period covered by the repo were taxable on Abbey National Treasury Services plc (ANTS).

The interest had been recognised in the profit & loss account of ANTS because the repo agreement involved cross options between ANTS and the other Santander group company that was a party to the repo, as part of the repo transaction. ANTS had been contending that the coupon receipts were not taxable as a result of the 1996 legislation. This legislation was subsequently updated (with effect from 1 October 2007) and is now included at CTA2009 s.332.

www.bailii.org/uk/cases/UKFTT/TC/2015/TC04424.html

5.3 International agreements on tax avoidance

The following agreements have been published:

  • The agreement between the UK and Netherlands on Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Bank Taxes (it entered into force on 30 April 2015).
  • An agreement for the exchange of information relating to taxes with Monaco (this entered into force on 22 April 2015).
  • An amending convention between the UK and Japan on the Avoidance of the Double Taxation and the Prevention of Fiscal Evasion with respect to the Taxes on Income and on Capital Gains (with exchange of notes). It entered into force on 12 December 2014.
  • A double tax convention with Kosovo for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, signed on 4 June 2015. It will enter into force when both countries have completed their Parliamentary procedures and exchanged diplomatic notes.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/432139/TS_14.2015_Cm_9068_PRINT.pdf

www.gov.uk/government/uploads/system/uploads/attachment_data/file/432149/TS_15.2015_Cm_9069_WEB_ACC.pdf

www.gov.uk/government/uploads/system/uploads/attachment_data/file/432113/TS_12.2015_Cm_9066_PRINT.pdf

www.gov.uk/government/uploads/system/uploads/attachment_data/file/432353/kosovo-040615.pdf

5.4 FST dismisses EU-wide minimum tax rate

In a speech at the 'Britain, Europe and tax competition' conference, organised by the European Tax Policy Forum and Institute for Fiscal Studies, David Gauke, Financial Secretary to the Treasury (FST), has dismissed European talk of a minimum tax rate applied on profits, saying 'Direct taxation is a matter for EU member states. Any EU- wide measure would require unanimity across all EU countries. Any form of EU-wide minimum tax rate would undermine our sovereignty and we therefore would block it. Put simply, it ain't happening.'

He did however express support for UK moves to crack down on base erosion and profit shifting through the diverted profits tax. In the speech, Mr Gauke also highlighted the difficulties with reducing the corporation tax rate beyond 20%, as demonstrated by the experience of the nil rate and 10 per cent rates of corporation tax that led to a great deal of tax motivated incorporation for little economic benefit.

www.gov.uk/government/speeches/financial-secretary-on-the-governments-business-taxation-plans

6.VAT

6.1 Reduced rate of VAT on energy saving materials

The CJEU has concluded that the UK reduced rate of VAT on the provision and installation of energy saving materials in residential accommodation, where the materials constitutes a significant part of the value of services supplied in renovating or repairing private dwellings, is not in accordance with EU VAT law. It concluded that the provision of such supplies at a reduced rate (including where the materials were not a significant portion of the value of those supplies) was only appropriate where the provision, construction, renovation and alteration of housing was part of a policy for defined social reasons that benefited the final consumer.

This may lead to a change in UK law and to HMRC VAT notice 708/6.

http://curia.europa.eu/juris/document/document.jsf?text=&docid=164731&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first∂=1&cid=618601

6.2 Paul Newey t/a Ocean Finance: Abuse of rights and the use of non-UK Entities

The Upper Tribunal (UT) has rejected HMRC's appeal against the First-tier Tribunal (FTT) 2010 decision that the Jersey company, which Paul Newey used for a loan brokerage business, was the supplier of loan brokerage services and the recipient of advertising services. The arrangement avoided irrecoverable input VAT on advertising costs but the UT considered the FTT was entitled to find that the arrangements were not wholly artificial. The UT took into consideration the June 2013 observations of the CJEU (case 653/11), but held that on the facts of this case the use of a Jersey structure did not constitute an abuse of rights.

www.bailii.org/uk/cases/UKUT/TCC/2015/300.html

We have taken care to ensure the accuracy of this publication, which is based on material in the public domain at the time of issue. However, the publication is written in general terms for information purposes only and in no way constitutes specific advice. You are strongly recommended to seek specific advice before taking any action in relation to the matters referred to in this publication. No responsibility can be taken for any errors contained in the publication or for any loss arising from action taken or refrained from on the basis of this publication or its contents. © Smith & Williamson Holdings Limited 2015

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